Here Are The Four Biggest Debates In The Markets Right Now

A
computer screen is reflected in the glass window of a booth where
a broker monitors the market.REUTERS/Akhtar Soomro

Steven Englander, global head of G10 FX strategy at Citi, says
that in recent conversations with clients, four big
"uncertainties in asset markets" stand out.

In an emailed note, Englander offers some color surrounding each
debate:

How much slack in the
U.S. economy? — This subject continues to come up in
client discussions, with many investors remaining skeptical that
the slack that Fed Chair Yellen sees in labor markets exists in
reality. The impact of last week's minutes was so powerful
because it was the first indication that Fed officials might be
wavering in their commitment. Fed Chair Yellen's testimony on
Thursday will be a focal point. We think early innings will go to
the Fed doves, but that the dovish view will be harder to
maintain as time goes on.

Weather —
Everyone talks about the weather but does nothing about it. In
financial markets, investors are staying on the sidelines until
the impact is resolved. We think that weather effects are likely
above 50% of the perceived slowing. The impact is most visible on
housing, but housing data were weak through most of the 2013, so
while housing may be most affected by the weather, it may not be
indicative of the overall impact on the economy.

China —
Davos-like China optimism coming out of G20 and surprisingly good
January data are paling against concerns that commodity
stockpiles are out of line with production prospects. There is
also considerable skepticism that the credit surge will continue.
It makes commodity currencies look increasingly vulnerable, with
AUD high on this list.

EUR — The
mystery wrapped in an enigma. Surprising encounters with
non-leveraged clients, who are very EUR positive. The argument is
that both sides of the current account identity are now EUR
positive. The current account surplus is there, and the
EUR-positive camp argues that the relevant asset prices for the
financial account are those of euro zone banks — up 22% since
end-September, +8% year YTD — and Spanish and Italian yields,
which offer the highest yield for the lowest risk (the worm has
turned). This is hardly a majority view, but the novelty is that
it is well-argued view. The counterargument is that euro zone
inflation is far below target in core as well as peripheral
countries, so the ECB will act to make euro zone assets less
attractive, but the counter-counter argument is that the pros are
the bird in the hand and the cons are deeply in the bush.

All of these debates are likely
to dominate for a while, as the weather issue likely won't be
resolved until April, when March economic data are
released. The labor
market picture will probably be obscured until then as
well.

In China, the big question is
how long the sell-off in the Chinese yuan — which appears to be
engineered by the PBoC in order to shake leveraged investors out
of carry trades — will continue. In the euro zone, the advance
estimate of February inflation out on Friday is the next piece of
the puzzle. Evidence of stabilization may keep the ECB from
moving to ease further for now.